The future outlook of the leasing
sector, both the leasing companies and the banks, seems quite promising

BY KHALIL AHMEDJan 02 - 08, 2006

The leasing concept is commonplace in
the western world for decades but in our country it prevailed in 1984, to be
precise. The initiative was taken by National Development Leasing Corporation
with the financial support of IFC and the ADB. The sector has mushroomed ever
since. By the end of 2002, the sector comprised 23 companies with another 8
Modarabas and today it stands at 33 companies and 18 Modarabas.

In 1980s, leasing companies could start
their business with a capital of Rs.50 million which was raised to Rs.100
million and today it stands at Rs.200 million which can be afforded by only
financially sound companies. Leasing business for the starters is an expensive
commodity these days but it fetches colossal gains as well. In the last six
months of 2002, leasing sector made aggregate net profit of Rs651 million as
compared to the profit of Rs721 million earned throughout 2001. In May 2003, the
leasing sector reported equity base of Rs15 billion; assets of 64 billion and
borrowings of 51 billion. In May last year, Leasing Association of Pakistan
members had a total equity of Rs14 billion and assets of Rs72 billion. They made
investments of over Rs42 billion in lease finance and the profits of leasing
companies were Rs1,717 million. The sector has also enjoyed an excellent
recovery rate of more than 80 per cent recently.

The leasing sector's foray into
Pakistani setup had commenced bringing lucrative profits for the leasing
companies by the year 2000 when the commercial banks made their entry with the
consent of the then governor SBP. The banks' low cost of funds, colossal
operational capability and extensive branch networks created a worrisome
situation for the leasing companies since their market share was being captured
by the banks. The entry of the banks into the sector brought the leasing
business in the limelight and it educated a common man about the pros and cons
of leasing/financing.

In 2003, Javed A.Callea, the then
chairman of Leasing Association of Pakistan, expressed his concerns before the
then governor of SBP regarding the invasion of the banks in the sector and said
that it was a competition between 'unequals'. He said, "How can a single
product company (leasing) compete with banks that are wallowing in liquidity and
undertake a wide range of activities?". Well, undoubtedly it was the
competition between the big and the small forces but for such competitions and
situations one has to take a lot of nerve to lead.

In 1526, Baber, the first Mughal
emperor, led an army of 25,000 soldiers to attack India. When he reached at
Panipat near Delhi, he was told that Sultan Ibrahim Lodhi was waiting for him
with an army of 100,000 soldiers and 1,000 trained elephants. This was the fight
between the 'unequals'. Baber using his intuition, sense of strategic management
and leadership skills subdued the invincible opponent and made history.

One contemporary example is that of the
USA. Whenever Europe makes any technological advancement, the USA gets
threatened as she is always under the impression that Europe shares its
technology with China. China is seen as future potential threat to the USA.
Europe launched GALILEO navigation satellite last week which was a cause of
concern for the USA since the USA dominates the space navigation at present. The
bottom line is that China's rise is inevitable and so is the success of banks in
the consumer leasing business. Why would a person opt for a leasing company
instead of a commercial bank which charges at least 3% to 4% less amount for
leasing/ financing.

Leasing companies claim for the
benefits provided to the clientele. A consumer likes to pay less for the
products and does not care for any hidden benefits in the first place. As far as
consumer leasing/financing is concerned, it is the banks which have made the
concept of lease and finance prevail. Leasing companies have been operating for
over two decades but have not been able to attract the attention of the masses.
Their concentration was focused on only the industrial sector. Yes, they have
been terribly successful in that effort. The commercial banks have made the
leasing/financing concept known through print & electronic media and by
massive advertisements on billboards. Leasing companies lag behind the banks in
consumer leasing/financing. Last week through an informal survey of 150
graduates and post graduates, I ascertained that hardly 10% were familiar with
the names and products of the leasing companies whereas 100% were familiar with
that of banks. When asked 15% told me that they would get their products leased
through leasing companies, whereas 85% were in favour of banks. If the leasing
companies have to persevere with their foray into consumer financing/leasing in
future as well, they need to maintain high profile and charge the competitive
interest rate.

There is no concept of 'unequals' in
love and war. Let me tell you about a few leasing companies which were known by
my survey sample. ORIX Leasing Pakistan Limited (OLP), a subsidiary of ORIX
Corporation and one of the largest leasing companies in Pakistan, was
established in 1986. It has a networth of Rs. 1.96 billion today. It has been
providing vehicle financing to individuals since 1992 and it has provided
finance for approximately 14,000 vehicles to date. Crescent Leasing, one of the
top five leasing companies of Pakistan in terms of total assets and
profitability, embarked in 1987. Saudi Pak Leasing Company Limited (formerly
Standard Chartered Merchantile Leasing Company Limited) was incorporated in
January 1991. Al-Zamin Leasing Modaraba commenced its operation in August 1992
and its equity now stands at Rs.341 million and asset base at Rs.2, 276 million.

We are predominately an agricultural
country with approximately 75% of our population living in rural areas and over
60% of our economy is contingent on agriculture. Industrial revolution is very
faraway. The contribution of the leasing sector, both leasing companies and the
banks, in agriculture is minuscule. The banks endeavour to cater to the urban
population and the leasing companies have been focusing the tiny industrial
sector neglecting the huge agriculture sector. Had the leasing sector
concentrated on agriculture sector, we would have become as strong in
agriculture as is the present day Brazil and our farmers would have got the
state-of-the-art agriculture equipment like the farmers of France and the USA.

The concentration of leasing sector in
our country is on plant and machinery, which accounted for 54 per cent of lease
disbursement in the financial year 2001-02. The break-up of lease disbursement
during 2002-03 shows 54.14 per cent for plant and machinery, 27.80 per cent for
private vehicles and 6.80 per cent for commercial vehicles. Last year, Chairman
Leasing Association of Pakistan (LAP) Basheer A Chowdry made it clear that the
recovery rate from agriculture sector was more than 80 per cent. Even after such
tremendous recovery rate agriculture sector is neglected like a step child. A
tiny number of our farmers have been able to lease tube-wells, tractors, and
modern agricultural implements. The scope of the leasing sector is restricted to
industrial equipment and automobiles. It is the fact that 08 out of 10
businesses use leasing to acquire equipment such as computer equipment &
software, office furniture, material handling equipment, manufacturing and
construction equipment, printing equipment, commercial vehicles,
telecommunication equipment and medical equipment.

Both the rivals, banks and the leasing
companies, need to look for diversification so that all sectors may be benefited
instead of focusing on just limited arena. There is a lot to be discovered.
There are other avenues like financing of warehouses, hospitals and educational
institutions, jewellery, fruits and vegetables, Information Technology,
fisheries and chemicals.

The future outlook of the leasing
sector, both the leasing companies and the banks, seems quite promising as the
benefits are alluring and the sector is gaining credence as well. All they need
is to use a proper marketing ploy.